Second-term economic blues
Dating to the 1870s, midterm elections during the second term of a presidential administration have not been kind to the political party occupying the White House. More recently, in 1974 Republicans lost 47 House seats and five Senate seats. In 1986, Republicans lost five House seats and eight Senate seats, costing them their Senate majority. Defying tradition, Democrats in 1998 actually gained four House seats without losing any in the Senate. In the sixth year of the George W. Bush administration, Republicans will be defending their congressional majorities in less than three months. With the economic and political cycles about to merge, now would be a good time to review how the economy has performed during the first five and a half years of the Bush administration and to compare that performance with the three most recent two-term administrations (Nixon, Reagan and Clinton):
Over the last five and a half years, gross domestic product (GDP) has increased at an average annual rate of 2.6 percent. During the first five and a half years of the other administrations, GDP grew at average annual rates of 3 percent (Nixon), 3.3 percent (Reagan) and 3.5 percent (Clinton). During the 24-month period ending in June 2006, economic growth averaged 3.3 percent per annum. Previously, during the two years ending with the second quarter of the secondmidterm-election year, GDP increased by 3.1 percent per year (Nixon), 3.7 percent per year (Reagan) and 4.1 percent per year (Clinton).
In the labor market, between January 2001 and July 2006, private-sector nonfarm payrolls increased by 1.6 percent (1.8 million jobs). Between January 1969 and July 1974, private-sector jobs increased by 12.4 percent (7.1 million jobs). From January 1981 to July 1986, private-sector payrolls increased by 10.7 percent (8 million jobs). From January 1993 to July 1998, private-sector employment rose by 16.7 percent (15.2 million jobs). Focusing only on the 36 months preceding August of the secondmidterm-election year, we find that private payrolls increased by 10.4 percent (6 million jobs) in the Nixon administration; 11.1 percent (8.3 million jobs) in the Reagan administration; 8.4 percent (8.2 million jobs) in the Clinton administration; and 4.8 percent (5.2 million jobs) in the current administration.
Regarding the unemployment rate, the electorate does not only judge the party occupying the White House based on the current rate; voters also react to how the unemployment rate has changed over time. In this context, the Bush administration inherited a 4.2 percent unemployment rate in January 2001. The jobless rate reached its cyclical peak in June 2003 (6.3 percent). Twelve months ago, it was 5 percent; and today it is 4.8 percent, having increased in July by 0.2 percent from its post-recession low of 4.6 percent.
The Nixon administration inherited a 3.4 percent unemployment rate. In July 1974, in the midst of a recession, the jobless rate was 5.5 percent, having increased from 4.8 percent a year earlier. On election day in November 1974, the rate was 6.6 percent, the highest level it had reached in the Nixon-Ford administration to that point. (It would eventually peak at 9 percent the following spring).
President Reagan inherited an unemployment rate of 7.5 percent, which peaked at 10.8 percent in November-December 1982 before steadily falling over the next three years. In July and November 1986, the jobless rate was 7 percent. In the Clinton administration, which inherited an unemployment rate of 7.3 percent, the jobless rate fell for eight consecutive years. By July 1998, it was 4.5 percent, falling to 4.4 percent on election day.
Through 2004, the latest year available, real (i.e., inflation-adjusted) median household income (the income level at the midpoint of the income stream) had fallen for five consecutive years. Measured in 2004 dollars, it was $44,389 that year, 3.6 percent below its 2000 level of $46,058. By contrast, real median household income increased by 1.3 percent from 1968 ($37,044) to 1974 ($37,519); by 6.5 percent from 1980 ($38,453) to 1986 ($40,939); and by 11.3 percent from 1992 ($40,422) to 1998 ($45,003), which exceeds the 2004 level ($44,389).
In January 2001, President Bush inherited an inflation rate of 3.7 percent, measured by the 12-month change in the consumer price index. A year ago it was 3.2 percent, nearly a point below today’s inflation rate of 4.1 percent. Mr. Nixon inherited a 4.4 percent inflation rate, which reached 11.5 percent in July 1974, having increased from 5.7 percent a year earlier. It was 12.2 percent on election day. President Reagan inherited a 11.8 percent inflation rate, which fell to 3.6 percent in July 1985, 1.6 percent in July 1986 and 1.3 percent on election day. The inflation rate in January 1993 was 3.3 percent, which declined to 2.2 percent in July 1997, 1.7 percent in July 1998 and 1.5 percent on election day.